Road to Retirement

Risk Management & Insurance

• Risk Avoidance: To avoid becoming involved or to eliminate yourself from a situation to avoid risk.• Risk Reduction: To take measures to reduce

your overall risk in a given situation.• Risk Sharing: To take measures to share your

risk with another, through insurance or risk transfer.• Risk Retention: To accept a given risk and

budget to prepare for that risk.

What’s my Risk?

R1

• Insurance is an agreement that protects you or your property in the case of injury, damage, or theft.

• Insurance protects your investment. If anything happens to something covered by your policy, the insurance company will pay for replacement, repair, or a cash settlement.

• Why do people purchase insurance? To protect:o Carso Homeso Health (medical, dental)o Liabilityo Belongings (renter’s insurance)o Lost Income (life insurance)

What is Insurance?

R2

• Protects you.

o In cases of medical emergencies or accidents, insurance can provide access to doctors, medication, and other things you need to remedy the situation.

o When you insure your car, the insurance company pays to repair damage to the vehicle.

• Protects your family.o It gives you peace of mind knowing your family will be provided for if you pass away.

• Protects your assets and income.o Having insurance can protect your assets and income in cases of accidents and lawsuits.o Insurance can significantly reduce costs of having to pay for major disasters on your own.

• Protects your credit.o If you are issued judgment from a lawsuit, your credit rating will be affected negatively.

• Protects items you own.o Belongings you insure can be replaced if something happens.

What is Insurance?

R2

If you roll:• Doubles (1s through 5s) – nothing, you are extra safe and get 1 extra ticket.• 3 – You fall and hurt your leg. If you have medical insurance you pay 1 ticket. If you do not you

pay 4 tickets.• 4 – You get into a car accident. If you are insured you pay 1 ticket. If you are not you pay 6

tickets.• 5 – Your apartment is broken into. If you are insured you pay 1 ticket. If you are not you pay 5

tickets.• 6 – You get the flu and need prescription antibiotics and a blood test. If you are insured you pay

1 ticket. If you are not you pay 4 tickets.• 7 – Someone hits your car in a parking lot. If you are insured you pay 1 ticket. If not, 3 tickets.• 8 – A pipe bursts in your apartment and ruins your couch and TV. If you are insured you pay 1

ticket. If you are not you pay 6 tickets.• 9 – A rock hits your car and breaks your windshield. If you are insured you pay 1 ticket. If you

are not you pay 5 tickets. • 10 – You trip and fall and sprain your ankle. You need crutches, an x-ray, and pain medication. If

you are insured you pay 1 ticket. If you are not you pay 8 tickets. • 11 – You want to get a flu shot. If you are insured you pay 1 ticket. If you are not you pay 3

tickets.• 12 – The roof collapses and damages all your belongings. If you are insured you pay 1 ticket. If

you are not you pay 10 tickets.

What is Insurance?

R2

• Example: Auto Insuranceo It’s the law in most stateso Accidents can happen, even to the best driverso Can you afford to repair or replace a damaged car?o Can you guarantee that other drivers won’t hit you?

• Example: Lawsuitso You can be sued even if you’re brokeo Even a fender bender can cost $100K in damageso Expensive cars can run up to $20K just to fix a bumper

• Example: Healtho Can you afford to pay for a doctor’s visit ($95-265)?o Are you certain you won’t break an arm or catch a virus?o Do you have allergies, wear contacts or glasses?o Do you need prescription medication ($50 average)?

What Insurance Do I Need? The Basics

R3

What Insurance Do I Need? The Basics

Aspects of Heath Insurance

• HMO/PPO: Different premiums and levels of flexibility.• Doctor/Facility Availability: Companies often contract with

specific doctors and facilities.• Premium: Monthly cost within your budget.• Deductible: Out-of-pocket fee before the insurance company

pays.• Co-payment: Like a deductible; applied to individual services

and prescriptions.• Exclusions: Not all services are covered.• Out-of-pocket maximum: Amount where your obligation

ends and the company pays100%.• Claim handling. Will a third party be involved?

Homeowners Insurance

• Covers:

o Liability for bodily injury and property damage due to your negligence.

o Accidents in your home and on your property.o Accidents away from your home for which you are

responsible.o Injuries occurring to others in or around your home.o Limited coverage for money, gold, jewelry, stamp/coin

collections.

• Does not cover:

o Floodo Hurricaneo Earthquake

What Insurance Do I Need? Advanced

R4

What Insurance Do I Need? Advanced

R4

Disability Insurance

• Odds of disability are higher than other risks.

• Most contracts unaffected by Social Security.o SS requires 12 months total

disability to collect.o Stringent qualification criteria.

• Other coverage uses:o Buy-sell agreementso Key-person indemnificationo Business overhead

• Chances of becoming disabled increase with age.

How to Buy Disability Insurance

• Benefit amount: Maximum monthly benefit. (Use worksheet to determine your need.)

• Occupation (disability) definition: Everything else stems from how the policy defines “disability.”

• Elimination period: Number of days you pay before the insurance company kicks in (AKA “waiting period”).

• Benefit period: Length of time benefit is paid.

What Insurance Do I Need? Advanced

R4

Long-term Care Insurance

Pays expenses not covered by health insurance or Medicare.

50% of Americans > 65 will require long-term care (CA Partnership for Long-Term Care Comprehensive Brochure, August 2004)

2010 average daily rate for private nursing home room = $206 (Genworth Financial 2010 Cost of Care Survey)

Nursing home rates increased on average >5% per year over last 20 years

35% of people in nursing facilities stay 1-5 years (National Center for Policy Analysis, 2005)

21% of people in nursing facilities stay longer than 5 years (CA Partnership for Long-Term Care, 2005)

Average length of time spent in nursing home = 2.4 years (MetLife Market Survey of Nursing Home and Assisted Living Cost, 2007)

o Insurance premium – The payment made to an insurance company in exchange for an insurance policy guaranteeing protection or coverage on the insured item.

oDeductible – The amount of loss you pay out-of-pocket to the insurance company on a damaged item.

o Insurance policy – A contract that describes the terms and conditions of insurance, including type and amount of coverage, premiums, and deductibles.

o Coverage limits – The maximum amount paid by the insurance company on a given claim.

How Insurance Policies Work

R5

How Insurance Policies Work

R5

VOCABULARYInsurance policy – A contract that describes the terms and conditions of insurance, including type and amount of coverage, premiums, and deductibles.

Insurance premium – The payment made to an insurance company in exchange for an insurance policy guaranteeing protection or coverage on the insured item.

Deductible – The amount of loss you pay out-of-pocket to the insurance company on a damaged item.

Coverage limits – The maximum amount paid by the insurance company on a given claim.

VOCABULARYInsurance policy – A contract that describes the terms and conditions of insurance, including type and amount of coverage, premiums, and deductibles.

Insurance premium – The payment made to an insurance company in exchange for an insurance policy guaranteeing protection or coverage on the insured item.

Deductible – The amount of loss you pay out-of-pocket to the insurance company on a damaged item.

Coverage limits – The maximum amount paid by the insurance company on a given claim.

Role Play Activity• Insurance agent – The agent must take a statement

about the car accident and be very critical of the policyholder. The agent acts in the best interest of the company, meaning their goal is NOT to pay claims to save money. The agent is trying to get a job promotion and knows that the company wants to pay the minimal amount possible. The agent in this case only wants to award the policyholder $1,900 total although the repairs look like they will cost $4,275.

• Policyholder – You were rear-ended on the freeway. You were driving carefully and being cautious and you have never had a prior accident. You documented the whole incident, filled out and obtained a copy of the police report, and are now trying to file a claim to get your car fixed. You have received three quotes that average $4,275. The insurance agent only wants to pay $1,900.

Insurance Claims

R6

• Choose a company by visiting AM Best: www.ambest.com, Fitch: www.fitchratings.com, Moody’s: www.moodys.com, and/or Standard & Poor’s: www.standardandpoors.com

• Ask questions.

• Be educated.

• Conduct due-diligence

• Visit your State Insurance Department Compliance. Find your state at www.naic.org.com. Your representative must be licensed in the state where you work or live.

Choosing an Insurance Company

R7

Why do you think it’s important to reduce risk?

How to Reduce your Risk

?

R8

Estate Planning

R9

Action Plan

• Make a list of all of your possessions and desires if you pass away.

• Complete your will immediately.

• If you have a fair amount of assets or any dependents, have your will reviewed by a professional.

• If you have a lot of assets, learn more about creating a living trust by doing research and talking to experts.

• Send copies of your will or trust to a loved one and keep it in a safe location.

• Make adjustments as needed to add assets or dependents.